2019 NCGFOA FALL CONFERENCE LGC Update

1. 2019 NCGFOA FALL CONFERENCELGC Update Manasa L. Cooper, Assistant Director Fiscal Management Section State and Local Government Finance Division

2. AGENDA • Announcements • Preparing for 2019 and Beyond • 2018 Revisions to Yellow Book

3. ANNOUNCEMENTS

4. ANNOUNCEMENTS • Staff changes: • In Fiscal Management • Kelley May, Debbie Clayton, Kathy Howell, and Donny Nobles joined staff • Susan McCullen is now Assistant Director • Preeta Nayak and Amy Szalaj have left Fiscal • In Debt Management • Alzada Smith has left debt management

5. ANNOUNCEMENTS • December 31, 2019 203s are scheduled to be a web-based product. • We have discontinued the publication of our annual Water and Sewer statistical report • Data will be available on the EFC Dashboard – more efficient to have all information in one place • https://efc.sog.unc.edu/resource/north-carolina-water-and-wastewater-rates-dashboard

6. ANNOUNCEMENTS ACC 3240 Local Government Finance course • CPCC is again offering a 100% online version this fall starting Sept 9th – registration is open • Likely be asking more campuses to run 100% online version • Feedback has been very good for this course overall

7. ANNOUNCEMENTS • 2020 Contracts • For charter schools: • A page is included for the auditor to list all schools included in the audit • Includes required statutory language that must be included in every contract that the charter school enters into. • Separate hospital contracts have been eliminated • Reference to AUP’s required by OSA have been removed

8. ANNOUNCEMENTS • 2020 Contracts • New paragraph added to the contract and new information is being requested on the fees page related to auditor independence • Please be sure to submit contracts through the contract portal and not the audit report portal • For a complete list and explanation of ALL changes and additions to the 2020 contract forms, refer to “Audit Contract Instructions” at https://www.nctreasurer.com/slg/lfm/forms-instructions/Pages/Annual-Audit-Forms-and-Resources.aspx

9. ANNOUNCEMENTS • 2020 Contracts • Will have template out by fall 2019 • Will have explicit instructions including examples of what is considered a fixed-fee contract and what is considered variable • Are adding our calculation of 75% cap to the audit fee worksheet

10. ANNOUNCEMENTS • Pension census data attest sample for 2019 is on our website • Units and auditors of record have been notified via email • Auditors should check the list for new clients that may have been selected • Due date was October 1

11. ANNOUNCEMENTS • Why is pension census data attest required? • OSA needs census data tested to support their opinion on the allocation tables and internal controls over retirement plans • If didn’t use the sample/attest approach, one of two things would have to occur: • OSA would have to come out and test your census data; your auditor should already be testing census data as part of the audit of payroll; attest is an extension of that. OSA doing the testing would be inefficient and more expensive • OR your auditor would have to determine the allocation for each client and test the internal controls of the retirement plans – extremely inefficient and costly overall

12. ANNOUNCEMENTS • What is involved in a pension census data attest? • Auditor tests for • Adequate internal controls around the data • Data reported to ORBIT is accurate • Employees and former employees are correctly in or out of the ORBIT system • Salary being reported to ORBIT is correct • Attest report issued saying data is materially correct, or not correct

13. ANNOUNCEMENTS • Units wanting to be on the LGC agenda for November 5, 2019 or later will need a final 2019 audited financial report • Report must be submitted by due dates set by SLGFD staff in order to be eligible to be on the next month’s agenda • Allows time for issuance of unit letter, receipt of sufficient response, and a unit visit if necessary

14. ANNOUNCEMENTS • Due dates for 2019 Audits for upcoming LGC agendas: • November 7 LGC meeting Audit due by October 18 • December 3 LGC meeting Audit due by November 15 • January 7, 2020 LGC meeting Audit due by December 13

15. ANNOUNCEMENTS • Preparing to Request Approval for Debt Issuance • If you are planning on requesting approval for a debt issuance in the next 12-24 months or so, and you have financial challenges and/or audit findings • Audit findings – you may request meetings with auditor and/or our staff to determine what needs to change in order to eliminate the finding if possible or mitigate if it cannot be eliminated • Financial challenges – you need to determine why (i.e. rates too low, collection percentage too low, etc.) and start making changes to address; several resources available if they need help with rate setting for utility funds

16. ANNOUNCEMENTS • Town of Eureka • Background • SL 2019-29 suspended the Town’s charter and gave control of assets to DST effective July 1, 2019 • On July 9, 2019, LGC voted to assume control of the Town’s finances • Only the 7th time the LGC has taken this action • Currently control Spencer Mountain and Eureka

17. Preparing for 2019 and Beyond

18. Preparing for 2019 and Beyond • Areas of focus audit reviews: • Audit opinions • Findings • Adequate explanations of due to/from, advance to/from, transfers in/out between funds • Continued review of pension and OPEB notes and presentation • New GASB standards – GASB 83 and 88

19. Preparing for 2019 and Beyond • Work with auditor on a schedule to give you best opportunity to get report in on time • New standards to implement • Actuarial studies coming due • Component units • Pension attests • Units should confer with their component units for reporting purposes to avoid surprises in October

20. Preparing for 2019 and Beyond • Allocating Pension and OPEB Liabilities and Expense/Service Cost • Benefits should be allocated to the fund in which they are earned • GASB guidance says to allocate but does not dictate methodology (CIG Q 4.173 and Q 4.353) • Liability is comprised of amounts for retirees and what current employees have earned up to measurement date

21. Preparing for 2019 and Beyond • Allocating Pension and OPEB for DPCUs • If an employee is earning a benefit both as an employee of a PG and a DPCU then benefits should be allocated to both • Some units treat employee costs for DPCU as contracted services • Finance officer must be an employee of government being served • Other employees may not meet IRS requirements of being independent contractors

22. Preparing for 2019 and Beyond • New requirement for reporting building inspection fees and related expenditures • S.L. 2018-5, Section XXI, page 162 • Fee revenue and expenditures to be reported on AFIR beginning with June 30, 2019 • Fees are those allowed under 153A-354 for counties or G.S. 160A-414 for municipalities.  • The language in both of these bills restricts the expenditure of the allowed fees to those expenditures incurred  "for support of the administration and activities of the inspection department and for no other purpose".(G.S. 160A-414, identical language included in G.S. 153A-354). 

23. GASB 88 Debt Disclosures • Illustration provided on the LGC Blog. • Not significantly different from what is already being disclosed.

24. 2018 REVISIONS YELLOW BOOK

25. 2018 Yellow Book Revisions • Beginning July 1, 2019, the 2018 revisions to the Yellow Book are in effect • Impactful changes to standards for financial and performance audits as well as reviews • Most impactful changes for financial audits of NC local governments are found in Chapter 3 – Ethics, Independence, and Professional Judgment

26. 2018 Yellow Book Revisions Preparation of draft financial statements in their entirety, from a unit’s trail balance or underlying accounting records, creates significant threats to auditors’ independence that will require the application of safeguards to reduce the threats to an acceptable level (United States Government Accountability Office, Government Auditing Standards - 2018 Revision, p. 51) (emphasis added)

27. 2018 Yellow Book Revisions • In addition to financial statement preparation, GAO has identified the following bookkeeping and financial statement preparation services as threats to the auditor’s independence (United States Government Accountability Office, Government Auditing Standards - 2018 Revision, pp. 51-52). Previous guidance did not specifically call these services threats: • recording transactions for which management has determined or approved the appropriate account classification, or posting coded transactions to an audited entity’s general ledger; • preparing certain line items or sections of the financial statements based on information in the trial balance; • posting entries that an audited entity’s management has approved to the entity’s trial balance; • and preparing account reconciliations that identify reconciling items for the audited entity management’s evaluation.

28. 2018 Yellow Book Revisions If providing any of these bookkeeping or financial statement preparation services, the auditor should • evaluate the significance of threats to independence • If, in the auditor’s professional judgment, he or she determines the threats are not significant, then the basis for this conclusion should be documented by the auditor • If the threats are considered significant, the type of safeguards that were applied to reduce or eliminate the threats should be documented • If safeguards cannot be applied to reduce to an acceptable level or eliminate the threat, the auditor cannot provide the services referenced nor perform the audit because the auditor is no longer considered independent

29. 2018 Yellow Book Revisions What are sufficient safeguards? These are some examples from the 2018 Yellow Book but auditors should not consider these to be the only safeguards that can be put in place (United States Government Accountability Office, Government Auditing Standards - 2018 Revision, pp. 38-39). • not including individuals who provided the non-audit service as engagement team members; • having another auditor, not associated with the engagement, review the engagement and non-audit work as appropriate; • engaging another audit organization to evaluate the results of the non-audit service; or • having another audit organization re-perform the non-audit service to the extent necessary to enable that other audit organization to take responsibility for the service.

30. 2018 Yellow Book Revisions How does the Yellow Book define “acceptable level”? An acceptable level is when a reasonable and informed third party would conclude that the firm could perform the audit without compromising its professional judgement (United States Government Accountability Office, Government Auditing Standards - 2018 Revision, pp. 37-38)

31. 2018 Yellow Book Revisions What happens if you cannot reduce the threat to an acceptable level? If the auditor believes that sufficient safeguards cannot be applied to reduce the threat to an acceptable level, then the auditor should not perform both the non-audit service of preparation of draft financial statements and the audit

32. 2018 Yellow Book Revisions Documentation is a critical step that auditors must not overlook “If you don’t document it, it didn’t happen” is a good rule of thumb

33. 2018 Yellow Book Revisions • The auditor should determine that management of the unit of government has designated an individual who possesses suitable skill, knowledge, or experience (SKE) to sufficiently oversee the non-audit services • Identified person does not have to have the SKE to perform or re-perform the services but must be able to have a sufficient understanding to oversee them • The identified person must be able “to determine the reasonableness of the results of the non-audit services provided and to recognize a material error, omission, or misstatement in the results of the non-audit services provided.” (2018 Yellow Book, 3.79)

34. 2018 Yellow Book Revisions • If the auditor determines that no one at the unit has sufficient SKE to oversee the non-audit services being provided by the auditor, then the auditor cannot perform both the non-audit service and the audit • The responsible person does not have to be the finance officer. • The unit of government may wish to consider if the finance officer would benefit from additional training in the area or areas for which he or she does not have sufficient SKE to serve in that role.

35. 2018 Yellow Book Revisions • What does this mean for NC local governments and their auditors? • Fewer firms willing to do audits for governments that cannot write their own financial statements OR are not willing to hire a third party to do it for them • Firms that believe they can reduce the threats to an acceptable level will spend more time on an audit, translating to higher fees for clients • More time spent on audits likely translates to fewer audits being completed by due date • Could see a growth in firms that focus on record-keeping and writing financial statements

36. 2018 Yellow Book Revisions • Changes present an opportunity to remind governing officials that the responsibility for the preparation and fair presentation of the financial statements in accordance with generally accepted accounting principles is with the unit’s management • If the auditor assumes this responsibility it impairs the auditor’s independence. This requirement has existed in the previous Yellow Book standards and has not changed

37. 2018 Yellow Book Revisions • Chapter 6 - Standards for Financial Audits • new and modified requirements for addressing waste and abuse • Waste is defined as the “act of using or expending resources carelessly, extravagantly, or to no purpose. Waste can include activities that do not include abuse and do not necessarily involve a violation of law. Waste relates primarily to mismanagement, inappropriate action, and inadequate oversight.”

38. 2018 Yellow Book Revisions • Guidance defines abuse as “behavior that is deficient or improper when compared with behavior that a prudent person would consider reasonable and necessary business practice given the facts and circumstances, but excludes fraud and noncompliance with provisions of laws, regulations, contracts, and grant agreements. Abuse also includes misuse of authority or position for personal financial interests or those of an immediate or close family member or business associate

39. 2018 Yellow Book Revisions • Auditors are not required to perform procedures to detect or report abuse or waste. Due to the subjective nature of waste and abuse, auditors should use their judgment on how or whether to communicate instances if the auditor becomes aware of them • Evaluating internal control in a government environment may include consideration of internal control deficiencies that result in waste or abuse. The 2018 revised standard provides examples of waste and abuse

40. 2018 Yellow Book Revisions • GAO has added the requirement that auditors should consider internal control deficiencies in their evaluation of identified findings when developing the cause element of the identified findings • Applicable to compliance findings that are direct and material • Auditors should determine the level of the control deficiency that caused the finding and if the deficiency is at least a significant deficiency, it should be cited in the report

41. 2018 Yellow Book Revisions • Memorandum 2019-07 2018 Revision –Government Auditing Standards (GAGAS) AKA “The Yellow Book” • Originally issued April 29, 2019 • Revised memo issued June 12, 2019 • May develop an FAQ on Yellow Book revisions

42. Sharon Edmundson Sharon.Edmundson@nctreasurer.com (919) 814-4289